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Debt & Bonds - Bringing bond trading onto exchanges.

Summary: Experts say that trading bonds through exchanges will increase transparency.

Trading in equities usually means working through securities exchanges. Bond (fixed-income) traders, how- ever, can make deals worth tens of millions of dollars away from ex- changes in over the counter (OTC) deals, often using just a phone. Af- rica's exchanges and policy-makers want to bring more bond trading onto regulated boards, such as secu- rity exchanges. They claim the switch would cut dealing costs, make it eas- ier to see prices on one screen and reduce clearing and settlement risks.

The Johannesburg Stock Ex- change (JSE) in South Africa, the continent's best-developed bond market with over R1.8 trillion ($125m) of bonds listed, has been lobbying since 2010 for change to increase pub- lic real-time transparency in the most liquid bonds.

"Under the Financial Markets Act 19 of 2012, trading in listed securities is required to be performed through a member of an exchange and as such, all trading in listed securities in South Africa is reported through the JSE," says Bernard Claassens, manager, fixed income at the JSE.

"Trading of bonds in South Africa is not consolidated through a central order book, as is the case with the equities market. Trading in bonds is facilitated over the phone by inter- dealer brokers (who are members of the JSE), through platforms such as Bloomberg and Thomson Reuters or bilaterally over the phone and then reported to the JSE for matching and settlement." The exchange channels details of bond trades for payment and for transfer of ownership at the central depository.

Bond market trading in South Africa is mostly in local currency and in government-issued bench- mark bonds. State-owned enter- prises, banks and mortgage and asset finance firms issue bonds, se- curitisations and commercial paper. For retail investors, government of- fers fixed-rate and inflation-linked bonds and Johannesburg City has offered Jozibonds. Claassens says South Africa is planning structural changes: "The National Treasury, in conjunction with the JSE, is looking to implement an electronic trading platform for primary dealers where price-making will be mandated. This model is accepted internationally and exists in most jurisdictions. This will be the most significant change to the South African bond market in more than 10 years and will result in a sin- gle portal for price formation in the local market." Primary dealers are a limited number of banks allowed to participate in auctions of key govern- ment bonds which also have to offer secondary trading.

Regional developments

Nigeria's FMDQ OTC Plc specialist exchange was formed as a self-regu- lating organisation by the Financial Markets Dealers Association and a committee of all banks and discount houses chaired by the Central Bank of Nigeria. It is licensed by the Secu- rities and Exchange Commission to operate all over-the-counter inter- bank market activity in fixed-income and currencies and started operating in November 2013.

"Data is not available right now but bonds traded on FMDQ are cur- rently estimated at 99% of total mar- ket trades," says Bola Onadele, man- aging director and CEO at FMDQ.

"The value of trades executed on FMDQ is high because its dealing members (banks) act as liquidity pro- viders in the market. FMDQ mar- ket focuses mostly on institutional investors while the Nigerian Stock Exchange focuses on the retail mar- ket." Clearer pricing through FMDQ and NSE make bonds an efficient way for state and city governments and enterprises to raise funds.

The Nairobi Securities Exchange Fixed Income Market Segment (FISMS) uses an automated trading system supplied by South Africa's Securities Trading & Technology Pty, which is integrated with the Central Bank of Kenya's electronic payment and settlement system. The NSE and CBK were African pioneers when they launched the system in Sep- tember 2014.

Bonds listed on the NSE include government issues between five and 30 years' duration, three government infrastructure bonds, and corporate bonds issued by PTA Bank, power producer KenGen and telecommuni- cation company Safaricom. Housing companies and financial institutions have also issued medium-term, fixed- rate and equity-linked notes.

Last October National Treas- ury, CBK and NSE worked together to prepare an innovative "mobile" Treasury bond to be available for some 23.3m Kenyans who use the Safaricom M-Pesa mobile money system. The M-Akiba bond would have a minimum investment level of KSh3,000 ($30) and be only available to Kenyans.

In August 2015 the Ghana Stock Exchange, the Bank of Ghana, banks and other capital markets players joined forces to launch a project to install a bond trading system for the Ghana Fixed Income Market, using a platform provided by Bloomberg.

Bond trading volumes have fallen. National statistics in Nigeria show turnover 37% down for fixed income and currency markets in the first seven weeks of 2016 compared to 2015. In Kenya, fixed-income sec- ondary trading fell by 39.7% from KSh1,012bn ($983m) in 2014 to KSh- 610bn ($592m)in 2015. Nairobi Securi- ties Exchange chief executive officer Geoffrey Odundo blames currency volatility, climbing interest rates and capital gains tax, which government introduced at 5% in January 2015 and scrapped in September after protests.

Selloua Chakri, head of market structure strategy, MEA, Bloomberg LP, says Islamic finance is also rising trend: "We are starting to see African countries' governments looking at Islamic finance in order to finance infrastructure projects with the issu- ance of sukuk. More and more coun- tries in Africa are already working on establishing legal frameworks."

Tighter global bank regulation makes banks hold back from trading, says Claassens. "As banks become more focused on utilisation and cost of capital, it is expected that their proprietary positions will continue to reduce. Inter-bank liquidity has fallen over the last few years in line with the increased capital charges. We expect to see a push towards cleared products, which will allow banks to hold less capital against cli- ent positions," he says.

According to Onadele, tighter restrictions on banks imposed under the Basel III framework will mean that issuers turn to the bond markets to raise debt: "We most likely will see an increase in the issuance of corporate and infrastructure bonds in the short to medium term."

He adds that getting sustained foreign investment into bonds de- pends on the right market structure: "It is very important in a global com- petitive environment that local mar- kets have a liquid currency market and hedging instruments to further encourage foreign participation."

The JSE in South Africa, the continent's best- developed bond market with over R1.8 trillion ($124m) of bonds listed.

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Publication:African Banker
Geographic Code:6SOUT
Date:May 31, 2016
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